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Cablegate: Air Jamaica Sale: Deal or No Deal? Goj Can't Stay On Message

VZCZCXYZ0000
OO RUEHWEB

DE RUEHKG #0743/01 3341350
ZNY CCCCC ZZH
O 301350Z NOV 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0322
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHDG/AMEMBASSY SANTO DOMINGO IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0092
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE
RUEHKG/AMEMBASSY KINGSTON

C O N F I D E N T I A L KINGSTON 000743

SIPDIS
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/ESC/IEC (GGRIFFIN)
EEB/IFD/ODF (MSIEMER)
EEB/TRA (VLIMAYE-DAVIS)
EEB/ESC/IEC/EPC (MMCMANUS)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA
OPIC FOR ALISON GERMAK

E.O. 12958: DECL: 2034/11/30
TAGS: ECON EFIN EAIR EINV SOCI PREL PINR TRSY IDB IMF JM
XL
SUBJECT: AIR JAMAICA SALE: DEAL OR NO DEAL? GOJ CAN'T STAY ON MESSAGE

REF: KINGSTON 737; KINGSTON 521; KINGSTON 471; KINGSTON 405
KINGSTON 901; KINGSTON 922; KINGSTON 306

CLASSIFIED BY: Isiah Parnell, CDA; REASON: 1.4(B), (D)

Summary And Comment

-------------------------

1. (C) Air Jamaica (AJ), the beleaguered national airline, is days
away from finding out whether Indigo Partners (operator of Sprit
Airlines) will be its new owner. The airline, currently owned by
the Government of Jamaica (GOJ), is eight months behind the
original deadline for privatization, but a final decision appears
imminent. According to sources involved in the AJ-side of
negotiations, there is still a real possibility that U.S.-based
private equity group Indigo Partners may walk away from the deal.
Unfortunately, AJ has no other offers on the table. Conflicting
public messages from GOJ officials are not helping AJ's bargaining
position; the Minister of Tourism recently told reporters at a
London tourism conference that the airline is now back on the
market for sale. A few days later the Minister of Information told
local reporters that the sale of AJ is contingent on a desperately
needed Standby Agreement with the International Monetary Fund (IMF)
(Reftel A). Adding to the confusion, an organization headed by a
former AJ pilot has promised to picket AJ in Miami on December 15,
unless Indigo withdraws from negotiations and the GOJ sells the
airline to employees--at a hefty 20 percent discount from the
undisclosed terms negotiated by Indigo. Given Jamaica's dire
economic situation, it is crucial for the GOJ to offload this loss
making albatross, which has bled more than USD 1 billion over the
last decade. Prime Minister (PM) Bruce Golding's inability to
coordinate his Jamaica Labour Party (JLP)-led administration to
speak with one voice on such a vital issue is further evidence of
his questionable leadership skills. The GOJ is facing monumental
financial challenges including multiple rating agency downgrades,
sluggish IMF negotiations, and falling tax revenue; the inability
to get on message to ditch AJ is nothing short of mystifying. End
Summary and Comment.

Final Weeks Approach

------------------------

2. (C) The Air Jamaica Privatization Committee (AJPC), supported by
funding from the World Bank's International Finance Corporation
(IFC) and the U.S. Trade and Development Agency (USTDA), has spent
nearly 20 months preparing for the divestiture of AJ, a goal now
eight months past the original deadline of March 31 (Reftel B).
Members of the AJPC are scheduled to meet with representatives of
Indigo in Florida the week of November 30, in an attempt to firm up
a deal. The final details of an agreement would still take a few
more weeks to complete. Emboffs spoke with Dennis Chung, one of
the members of the AJPC team, on November 20; he said there were
still eight issues outstanding between the AJPC and Indigo, but
only one or two were serious enough to cause a stalemate. AJPC
recognizes that it faces a tough negotiator in William Franke,
Managing Partner of Indigo, who is a veteran of the airline
industry. (NOTE: Franke was Chairman and CEO of America West
airlines for eight yeas and worked to acquire a majority stake in
Spirit Airlines in 2006 where he serves as Chairman of the Board.
He also serves as Chairman of Tiger Airways based in Singapore and
WizzAir based in Hungary. END NOTE).

Absence of Alternatives

------------------------

3. (C) AJ has lost nearly USD 1 billion over the last decade
(Reftel C and D) including nearly USD 173 million in 2008. Some
elements of the GOJ, including PM Bruce Golding, are desperate to
remove the loss making entity from the GOJ's books, particularly
before the next budget cycle begins at the end of March. However,
Golding does not appear to have the leadership skills needed to
galvanize support for the sale, even within his own party. (NOTE:
The GOJ has been in negotiations with the IMF since July for a
Standby Agreement; the delay in securing an agreement, coupled with
multiple recent credit downgrades from international rating
agencies, is placing greater pressure on the GOJ to get its
financial house in order and to calm an increasingly skittish
private sector). Minister of Tourism Ed Bartlett has been vocal
about keeping AJ under Jamaican control to support the tourism
sector by guaranteeing airlift to the island. The ever politically
influential Gordon "Butch" Stewart, who owns the Sandals group of
resorts and for a few years actually ran AJ, also is keen to keep
the airline in Jamaican hands to bring a ready supply of tourists
to his all inclusive hotels (Reftel E).

Airline Will Fail in Employees Hands

-------------------------------------

4. (C) There is no doubt that many Jamaicans have an emotional
connection to AJ; when it appeared that the Trinidad and
Tobago-owned Caribbean Airlines might purchase AJ, there was a
vociferous public outcry, often in the form of in newspaper
editorials. (Reftel C). Although U.S. ownership appears more
palatable to the Jamaican public, there are many who want the
airline to remain Jamaican owned. A new organization Mayday Air
Jamaica led by Wesley Sampson, a former president of the Jamaica
Airline Pilots Association, is advocating this position. Sampson
calls the airline a "national treasure" and "the only resource to
be handed down to the children of Jamaica in the hopes of a better
future." He is asking the GOJ to sell AJ to its employees for a 20
percent discount on whatever deal it has negotiated with Indigo
(NOTE: The terms of a potential agreement with Indigo have
remained private, but are likely to include the GOJ assuming all of
AJ current outstanding debt, with a commitment from Indigo to
adequately recapitalize the airline and retain the AJ brand, END
NOTE). In a feeble attempt to disrupt holiday travel, Sampson is
promising to picket AJ flights in Miami on December 15 if the sale
goes through to Indigo. In reality, the AJ employees do not have
the capital to take control of the airline, nor do they have the
leadership needed to adequately run it. Chung, commenting on this
proposal to Emboffs, said the airline would definitely fail within
six months if it were taken over by employees.

AJ In Better Shape, But Faces Stiff Competition

--------------------------------------------- ----

5. (C) AJ CEO Bruce Nobles spoke with Emboff on November 20. He
discussed his continuing efforts to restructure the airline, cut
costs, and position it for sale. AJ secured a parliamentary
guarantee on June 11 for a USD 101.8 million loan to finance
operations until the divestiture was complete, but AJ is still
waiting on USD 23 million of these funds to be dispersed.
Meanwhile, AJ is facing increased pressure from Jet Blue which has
added new flights to Montego Bay and Kingston in the past year.
Jet Blue also has plans to add new routes from Orlando and Boston
to Montego Bay in 2010 (Reftel F). Nobles said the operating loss
for AJ will be down 70 percent from last year, and the airline will
be close to a break even point by next year. He said AJ is now
managing cash flow pretty well, and revenue per seat mile is up
five percent this year, while on time performance is up 50 percent
over last year. He said advanced bookings are facing challenges,
as ticket buyers are reluctant to buy seats on an airline with an
uncertain future or with hopes that fares will fall.

JLP Needs To Get On Message

---------------------------------

6. (C) On November 20 during an interview with The Gleaner
newspaper, Minister of Information Daryl Vaz indicated that the AJ
divestment was contingent on the signing of a Standby Agreement
between the GOJ and the IMF (Reftel A). Nobles tried to distance
the AJ sale from IMF negotiations by saying it was the first time
he had hear of this link, adding that he is busy running the
airline, and is not involved in discussions with the IMF. The week
before, Tourism Minister Ed Bartlett, who was at the World Tourism
Market in London, told the press that AJ was "now back on the
market for divestment." Nobles, who also attended the event, said
he pulled Bartlett aside to clarify that his comment was incorrect,
as negotiations were still progressing with Indigo. Even after the
warning, Bartlett chose to repeat the comment to the press later
that day. Nobles told Emboff that Dennis Lalor, the chair of the
JAPC who is leading negotiations with Indigo, "went berserk" when
he heard Bartlett's comments. Nobles, who has been in three
previous negotiations with Indigo's Franke, described him as a
tough negotiator who should not be underestimated. Nobles said he
has seen Franke walk away from deals at the very last minute, if he
thinks deal will be more trouble than it is worth. Nobles, noted
that the media back and forth by the GOJ is not helping the talks.

Comment

------------

7. (C) As the AJ negotiations near their final days it is crucial
for the JLP to stop equivocating in the press, and fall in line
behind a single message of selling AJ. Despite PM Golding's
personal interest in finalizing this sale, he has not been able to
keep his party on message, including his own Information Minister.
Echoing similar comments heard by the private sector, Nobles said
he is "very concerned" about Golding's leadership. After a year of
restructuring at the hands of Nobles, AJ is in the best position
to be taken over by a new team and recapitalized. If the Indigo
purchase fails or if Nobles, who has held to a hectic schedule
trying to prepare the airline for sale, should depart, AJ is not
likely to retain the management/operational improvements it has
achieved. AJ has not really made a profit in its 40 years of
existence, so it is likely to slide back into its old ways of
racking up multimillion dollar losses. It will be major political
success for PM Golding if he can see this deal through, as well as
a major benefit to the GOJ's fiscal bottom line. End Comment.
Parnell

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